Recent events in the banking world have once again highlighted the importance of understanding how Federal Deposit Insurance Corporation (FDIC) insurance covers deposits, which prompts similar questions about how investment assets are treated in the event of a brokerage firm (broker-dealer) failure. While there is comparable—but not identical—insurance coverage for brokerage assets through the Securities Investor Protection Corporation (SIPC), it is important to first understand how creditors look differently at segregated assets (like those held in the typical brokerage account) versus non-segregated assets (like bank deposits) if there were ever the need for the liquidation of a brokerage firm’s assets.
Segregated assets are investment assets held in dedicated, individual accounts at a broker-dealer, and they are the first line of defense that provides a crucial part of the regulatory framework that governs broker-dealers. This definition of individual accounts includes not only regular individual accounts, but also joint, custodial, and trust accounts. The Securities Investor Protection Act of 1970, which established the SIPC, requires broker-dealers to maintain separate accounts for customer assets to deliberately segregate them from the broker-dealer’s own assets, hence protecting them from any potential bankruptcy or insolvency.
Beyond the segregated account itself, if a broker-dealer should fail, the SIPC insurance would get triggered, if necessary, to help cover most types of underlying assets in customer accounts, including typical stocks, bonds, and mutual funds; only certain less-common assets like futures contracts and directly held commodities are not covered by the SIPC (and we do not invest in such assets). It is important to keep in mind, though, that the SIPC provides insurance protection for customers of failed broker-dealers, but not protection against possible investment value losses due to market activity. SIPC insurance provides coverage up to $500,000 per customer (including $250,000 for any cash claims).
If a broker-dealer should fail, the SIPC appoints a trustee to take over the broker-dealer’s business and liquidate its assets, using only the broker-dealer’s non-segregated assets to pay off its creditors. Customer segregated assets, on the other hand, are not part of the broker-dealer’s assets in the first place and are therefore not available to pay off its creditors.
While the recent bank-related events will likely continue to impact markets over the coming weeks and months, we believe the case for highly diversified portfolios, across asset classes and allocated and rebalanced in a straightforward and philosophically consistent manner, will serve you well. And importantly, assets placed in a brokerage account belong to the individual and not the institution. At Sand Hill, we work with both Fidelity and Schwab—two of the largest and most well-known broker-dealer firms in the industry—and both carry excess SIPC coverage through other insurers such as Lloyd’s of London for their clients’ portfolios. That is why we believe that our structure of using registered third-party custodians remains the most secure approach to ensuring the safety of your assets.
Sources:
Securities Exchange Commission (SEC), Ropes and Gray, Financial Industry Regulatory Authority (FINRA), Charles Schwab, Fidelity Investments, SIPC.
Articles and Commentary Information provided in written articles are for informational purposes only and should not be considered investment advice. There is a risk of loss from investments in securities, including the risk of loss of principal. The information contained herein reflects Sand Hill Global Advisors' (“SHGA”) views as of the date of publication. Such views are subject to change at any time without notice due to changes in market or economic conditions and may not necessarily come to pass. SHGA does not provide tax or legal advice. To the extent that any material herein concerns tax or legal matters, such information is not intended to be solely relied upon nor used for the purpose of making tax and/or legal decisions without first seeking independent advice from a tax and/or legal professional. SHGA has obtained the information provided herein from various third party sources believed to be reliable but such information is not guaranteed. Certain links in this site connect to other websites maintained by third parties over whom SHGA has no control. SHGA makes no representations as to the accuracy or any other aspect of information contained in other Web Sites. Any forward looking statements or forecasts are based on assumptions and actual results are expected to vary from any such statements or forecasts. No reliance should be placed on any such statements or forecasts when making any investment decision. SHGA is not responsible for the consequences of any decisions or actions taken as a result of information provided in this presentation and does not warrant or guarantee the accuracy or completeness of this information. No part of this material may be (i) copied, photocopied, or duplicated in any form, by any means, or (ii) redistributed without the prior written consent of SHGA. For disclosures, including additional information on credential designations of SHGA representatives please see our Form ADV Part 2A and 2B Disclosure Brochures, which can be obtained by clicking here.
Video Presentations All video presentations discuss certain investment products and/or securities and is being provided for informational purposes only, and should not be considered, and is not, investment, financial planning, tax or legal advice; nor is it a recommendation to buy or sell any securities. Investing in securities involves varying degrees of risk, and there can be no assurance that any specific investment will be profitable or suitable for a particular client’s financial situation or risk tolerance. Past performance is not a guarantee of future returns. Individual performance results will vary. The opinions expressed in the video reflect SHGA's or Brenda Vingiello’s (as applicable) views as of the date of the video. Such views are subject to change at any point without notice. You should not treat any opinion expressed by SHGA or Ms. Vingiello as a specific inducement to make a particular investment or follow a particular strategy, but only as an expression of general opinion. Nothing presented herein is or is intended to constitute investment advice, and no investment decision should be made based solely on any information provided on this video. There is a risk of loss from an investment in securities, including the risk of loss of principal. Neither SHGA nor Ms. Vingiello guarantees any specific outcome or profit. Any forward-looking statements or forecasts contained in the video are based on assumptions and actual results may vary from any such statements or forecasts. SHGA or one of its employees may have a position in the securities discussed and may purchase or sell such securities from time to time. Some of the information in this video has been obtained from third party sources. While SHGA believes such third-party information is reliable, SHGA does not guarantee its accuracy, timeliness or completeness. SHGA encourages you to consult with a professional financial advisor prior to making any investment decision.
